♪ i'm jim cramer and welcome to my world. you need to get in the game. firms are going to go out of business, and he is nuts! they're nuts! they know nothing. i always like to say there is a bull market somewhere. i promise to find it just for you. "mad money," you can't afford to miss it. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i'm trying to make a little money. it's not my job just to entertain, but i'm doing some teaching tonight. so call me at 1-800-743-cnbc. earnings season. earnings season. i dread earnings season. why? because it is overwhelming with so many companies reporting at once and so much data being thrown at you. because it's hard to keep track of the expectations and to really know what is better than

expected, what the whisper, the real benchmark that must be beaten is. nah, uh-huh. it's because i have a really bad back. i can't stand carrying the printed out versions of the conference calls as i schlep from downtown manhattan to my studio here where i do "mad money" in englewood cliffs. tonight i want to do something different. i got to help you this earnings season. i want to offer you a new way to use earnings season to put it in perspective. because most of you who watch this show are not the day traders that really hijack a lot of the thinking. you're not trying to game a given quarter. because it becomes so difficult to predict, and often the initial moves aren't even accurate because of the press coverage, or because something is nasty in the overall market, because of europe or something involved in the election. in other words, other than for those who are shorting or going long stocks ahead of the quarter, these earnings reports need a context to make you money. they can't be relied upon anymore because they aren't as predictive of future behavior as they once were. they are a piece of the puzzle,

a part of the mosaic. but they're only one of many important parts of what predicts where a stock will go over the intermediate term. that tends to be the focus that i teach about on the show. and it is a teaching show, because i want you to know the metrics i'm using to pick stocks i talk about and recommend here, and with my charitable trust, which you can follow along. i want to teach you how to listen to the conference calls, read them in the transcripts, at least give you my opinion of what matters on the calls and how i let them factor into my thinking of picking stocks. i'm hoping this show will once and for all -- because this is what i see on jim cramer on twitter constantly -- tell you how to evaluate your portfolio, figure out what you need to trim, what you need more of. let it hone your way of thinking -- not mine, but yours. earnings season is incredibly important, what it tells you about a host of issues, four times a year, big report cards. not just the trajectory of the estimates. we're going to flush all that out. i'm so tired of the estimates of

a penny or two. that's not making anybody any money. look, we can't dismiss earnings season. that would be totally wrong. we just got to put it in context. here is how i use these reports that we constantly refer to. first, i assess them for their predictive value for the year. to do that, try to discern where analysts go with their estimates after the companies report. do they raise them? do they lower them? do they keep them the same? let's say apple issues a report that is not only better than the posted numbers that you can find on a lot of web sites but also beats what is called the high man. the analysts that are the aggressively high estimates on the street. that will cause a raising of the numbers by everyone. or if it is the end of the year for the numbers and the year after it. i use that increase in earnings per share, the ones that they bump it, okay, to figure out several things. first, try to figure out if the increase is from real business, okay? actual sales. do they do better? and not just accounting changes and share count changes.

the latter fools a lot of people. to do what i like to do, i look more at the revenues than the actual earnings themselves. why is that important? because the company can't change the sales line except increasing demand, producing more, gaining more customers, either at the expense of others, through better salesmanship and execution and customer acquisition. they're making a better job. they're working harder. they're working it better. but a company can easily change the earnings by buying back a ton of stock. not the sales line, but the earnings. simply changes the denominator, the number of shares. keeping the numerator static. revenue growth in the quarter, particularly the holy grail, accelerated revenue growth, argh! quarter over quarter and year over year drive my thinking. they allow me to figure out revenue and earnings growth. what i really talk about on this show. that allows me to figure out what to pay for the stock in the future. lots of people examine the price-to-earnings multiple of the stock and make a determination of the stock's worth in what i called the p/e vacuum, the price-to-earnings

multiple a vacuum and sell at 20 to 30 times when the stock sells 11. they say oh, that's too expensive. it sells more than the average stock. lazy thinking. you need to figure out the growth rate using the prism i just laid out for you. figure out how fast the company is growing, link quarter, the previous one and the current one and the year-over-year quarter. and calculate that trajectory versus growth rate. here, here, put it simply. if a company growth is 20% and the per earning per share is 20 or less, hey, you know what? you probably have a big bargain on your hands. we call that using the p.e.g. ratio. again, fundament of this show. the price to earnings to growth ratio, a much more important ratio than the price to earnings multiple because it puts the multiple into context you can use compared to other stocks. we're always comparing stocks on this show. i'm willing to pay up to maybe twice the growth rate of the company, especially if there is very few companies growing that fast. meaning there is a scarcity of value of fast growing companies.

higher than that, paying, say, a 70 times earnings for a company that is growing at 40% begins to get me nervous. even 40% growth is very hard to come by. that's nosebleed territory, and there are too many things that can go wrong with a stock when that happens. the converse is true too. when i see a stock that sells for less than one times its earnings per share growth, i begin to salivate, because unless there are other factors going against it, the factors that we'll cover in the rest of this special show, i'm drawn enough to the stock that i have to find other reasons not to buy it. so the bottom line, i use the actual earnings per share reports to figure out the growth rates of the stock, and if the growth rate is high and the price-to-earnings multiple based on the future projections is equal to or less than twice the growth rate, then i'm interested enough to proceed with the rest of the work that this special show will detail. i need to go to brad in south carolina. brad? >> caller: hey, jim, i want to give you a big ron paul boo-yah to you. >> wow, okay. that's aggressive. i'll take that.

go ahead. >> caller: hey, jim, i'm wondering how to best prepare for this earnings season in terms of online resource. give me the inside scoop of what your browser tabs will look like as you stay on top of the of all the updates. >> okay, what i like to do -- first of all, i watch cnbc. i'm not kidding. cnbc covers the earnings season better than anyone. i actually go to the web sites. the web sites are now so, so good that literally they will have the analyst reports, they will have a lot of the projections. then i like to look at the news stories to get a sense about what the consensus is. and then i look at the analyst reports the day after. and all that has to be done if you're going to really sink your teeth in and feel very confident. start with the web site of the stock. let's go to daryl in california, please. daryl? >> caller: yes, boo-yah, jim cramer. >> boo-yah! >> caller: i have a question there. what is meant by a reverse split stock? >> that means if there is a

million shares, let's say they do a three to one, make it 300,000 shares. what it typically does -- citigroup did one of these, okay. what it does if you have like 300 billion shares, you divide it by three. you get 100 billion. it does raise the price, but it's a loser. you just have fewer shares. tyler in florida, please. tyler? >> caller: hey, jim, i'm going to give you a south florida boo-yah. >> oh, i'll take that. i need to go there now. always. what is up? >> caller: hey, the sun is shining -- no, it's not. it's overcast. hey, quick question for you. when you talk about the economy, you know, really booting off again, it seems like you talk about it in terms of consuming and not producing. and i'm thinking, you know, from the way i think about it, you need something to be produced before it's consumed. so i'm wondering why in terms of a growing economy you talk about consumption instead of production. that is what it seems like to me. >> well, i do because in order to be able to raise price, you need demand. if there is a shortage of supply, sure, that can mean something. but not if there is no demand,

right? if you have a shortage of a supply of some product that nobody likes, you can't raise price. it doesn't mean anything. a company has got to earn its stars before you buy it. okay. use the eps to figure out a company's growth rate, and then take it from there. "mad money" will be right back. build your future -- >> happy boo-yah to you. thank you for not just the money, jim, but what the money translates into. in my case, a college education for my son. >> boo-yah! thanks a lot for your passion for stocks. "mad money" does work for the small investor like me. >> "mad money," you're making me money for college. jim boo-yah, i love you. >> how many other shows have kids calling in and saying "boo-yah?" >> one boo-yah at a time. "mad money" with jim cramer, week nights 6:00 and 11:00 p.m. eastern, only on cnbc. miss out on some "mad money"? get your "mad money" text alert

today. text "mm" to 26221 to get cramer right on your phone. for more info, visit madmoney.cnbc.com, or give us a call at 1-800-743-cnbc. another cup of coffee? how long is this one going to last? forty-five minutes? an hour? well... listen. 5-hour energy lasts a whole lot of hours. take one in the afternoon, and you'll feel alert and energized 'til the cows come home. it's packed with b-vitamins and nutrients to make it last. so what's it going to be, partner? 5-hour energy. wise choice. 5-hour energy. hours and hours of energy. starts with arthritis pain and a choice. take tylenol or take aleve, the #1 recommended pain reliever by orthopedic doctors. just two aleve can keep pain away all day.

back to the news. you can have up to 28 days of beautiful, smooth skin, with veet wax strips. veet hair coating technology removes hair as short as 1.5 millimeters... ... and leaves your skin smooth for up to 4 weeks. try getting that with a razor. with veet you'll always be putting your best skin forward. veet. what beauty feels like. also try new veet high precision facial wax for salon-quality smoothness that lasts. i don't want to just eat plants. [ dog 2 ] what do i look like? a rabbit? yeah, maybe, but i don't want to eat like one. [ male announcer ] most dry foods add plant protein, like gluten but iams never adds gluten.

iams adds 50% more animal protein, [ dog 4 ] yum! [ male announcer ] a naturally complete protein source. [ dog 5 ] iams keeps this body strong as an ox. i mean dog. [ male announcer ] iams. not just food. nutrition for life. [ dog 6 ] i am an iams dog. not a rabbit. woof. >> welcome back to the "mad

money" earnings season, how not to be overwhelmed and to put it in perspective so you can profit from them in an informed way and make money at home. we talked about figuring out the growth rate, and whether the stock rate is too expensive or cheap against the sector and the rest of the market. the next way i use the earnings report is important because of the etf' zation of the market. even more important than the growth rate than the price of the stock and earnings per share. i measure the stocks' earnings growth and quality of the earnings growth against the cohort. and then whether the cohort is worth owning or forgetting. wow, that's right. for most of my more than three decades of investing, i accepted that the sector is important. when you pick a stock it matters. in the past it has counted maybe as much as 50% of the stock. and because people trade as etf's and they are important for

people and hedge funds to make decisions, the sector is super -- it superseded earnings at times. it's an afterthought for companies. the banks, it did not matter whether they had weak or strong earnings or were in the red or black. people did not want to own the xlf, it did not matter how a bank did. wells fargo, u.s. bank corps, they had little exposure to weak in europe and -- j.p. morgan stanley with tremendous exposure. that is why at times i had to dismiss the earnings per share gains entirely if the cohort was radically out of favor. but i never just forget them, instead, i try to choose, figure out which ones can at times break the tug of the sector and which can shine, because if the

sector falls back into favor, i got to be ready. ever since the market's bottom, remember the march bottom, generational, we've seen sectors of retail and stocks within that outperform. i like to 11 to earnings of all the retailers but i am wrapped by the groups doing the estimate about. by far the top performers have been the discount stores. particularly the dollar stores, notably dollar general and dollar tree, when i see money tied to retail, i go back to my memory and reach for them, they have the most earnings momentum, i know that because i listen to the calls. even though the group may have been out of favor of late. so when everyone piles into the retail etf, which i use the rth, i'm in there with the ones with the best momentum. and i've been in bed bath and beyond during the sectors, when they grab a sector, because they have the most inexpensive earnings momentum. and there's another strategy

that i want to let you in on. when i know the best are the best in earnings because i focused on a call, i might, to hedge my bets, sell the eft and buy the best performers in the etf according to my earnings per share worth, that way if the move is for the worst and we get a government number or weakness out of europe, i can lose less than people playing the earnings momentum game, because i own the best. and technology, the group of stocks that is just about 15% of the s&p 500, the tech is a big part of the category. cell phones, tech -- telecommunications tech, infrastructure stocks, and each has a separate growth rate and here i like to look at the earnings per share growth rate

of the companies i follow against the sector. the sector cross does not work. growth rates can be extreme that means there's no room for error that means that something is wrong. there's no room for air or hair as we call it, some chink that upset the growthplate. in 2011 one of my favorite companies reported magnificent quarters but the earnings were worse than i liked and it pancaked and stayed ugly for a long time. why? because it underseveraled its portion -- underperformed its portion of the stock sector even as the growth rate was out standing to a personal computer related stock. knowing what the sector is not enough. you need to know how the company stacks up against the growth rate of that sub sector and you have to have a handle if the larger sector is in favor or not. bottom line -- nothing is worse than owning a bad stock, in a back sector

neighborhood. nothing is better than owning a good stock in a great neighborhood. if you do not measure the stock earnings against the sector growth and whether the sector is in favor versus out of favor, then the earnings report better than expected or not won't mean a thing. when we return, i'll give you seven more ways to use the reports in the context of stock picking not just trading which i have come to see as pretty of a zero sum gain. save it. [ male announcer ] oh, to suffer with dandruff that keeps coming back.

women hate it. but now, sad man, you're saved by a new anti-dandruff shampoo. clear men with mint, ginseng and tea tree. clear men feeds your scalp and stops dandruff at the source. ahh, look at him now. admire the scalp. he's heroic. clear men. feed scalp. stop dandruff at the source. with resolve deep clean powder. the moist powder removes three times more dirt than vacuuming alone while neutralizing odors for a clean you can see, smell and really enjoy. don't just vacuum clean. resolve clean.

tonight we are talking about not just who reported a better than expected quarter, something we always get caught up in, but how to put together the reports to create a great portfolio. we've established the importance of what they tell us about the growth of a stock and how it

fits into a sector and the gravitational pull that can overwhelm even the best earning reports. hey, best house, bad neighborhood, neighborhood wins. now, we have to dig further than the headlines, to check out what else on the conference call, or the reaction to the call that can help us make some money. we do not stop with just the call. what else is important to listen to in these? the analysts will tell you that the most important predictor of future earnings is the growth -- gross margin. what is left after the cost of sales is subtracted. i want to explain it in a way any kid can understand. the lemonade stand is simple to understand. you figure out how much the lemons and sugar cost you and what you have, and that is your profit. time it took to make the sign, and labor equipment and so forth. same thing goes for publically traded businesses. we try to figure out the cost of the goods, whether they are going up and down, that is inflation, how much the labor

costing, very important in a rising salary environment, how much leverage there is, meaning if you have all the labor and cost accounted for how much business can you do. the thing that i like to think of is chipotle. they have gross margins at many of their stores -- they have labor and food and customers, the more customers they serve per hour, the more leverage they have. the cost of the food and the cost of the labor and the number of customers they can push through in a given day are the factors. there are dozens of inputs used in the stores. we need as little turnover as possible, because the cost in training in new employees is tremendous, that is something that the former ceo of costco made clear on many occasions on the show. he was legendary for paying the employees the most and treating them with the best of benefits because it's so important to keep them happy so they do not have to train new people.

they are not known to the customers and new people cost too much money. same for chipotle, where people are given the opportunity to run more stores. mcdonald's praised for their margin improvement, it has good leases and leverage for buying food, and it's a innovator. they got huge leverage per hour. gross margin comes into play in different ways. often it has less to do with the cost structure of the country and more to do with the inventory conditions of an industry or given company. now we are talking tech. semiconductor companies often produce flat out, make as many chips as they can 24/7 but sometimes the supply chain gets overwhelmed, it gets glutted.

to move more inventory they have to cut price and that lowers their gross margins and makes their earnings too tough to predict and that gives them a high priced earnings multiple. that's when you see preannouncements. we like companies with consistent growth, and we pay a higher multiple for them, and we do not like the inconsistent growth that tech gives us. used to pay high multiple, but no one could handle all that inventory glut that the happening with them one or two times a year. at times the product from other items from other countries, caused glut, i listen closely to commodity calls because if there's glut in the system, that means that i have to get you out of the stocks quicker than i do. i have to work faster. do not believe for a moment that it's just the commodity producers that are effected by the gross margin issues. i listen to all the pharmaceutical calls, and i hear

about generic competitions and what it means more margin earnings. a product that falls in price, i tell you to get out. i think it will try low, even if it was high in the past. until a stock discounts that i have to keep you out of it. very few drug companies are immune from it. i steer clear until everyone knows about the patent clip, and then i can go back. finally there are gross margins of the oil and oil service companies, these are the hardest, you have to find out how much it costs to ship it and refine it, it's complicated. many companies have tried to break themselves up so they are easier for guys like me to figure out gross margins instead of having to be a blend that i got to unwrap. i care about finding costs and end market prices. that is why the natural gas companies, for example, traded

at a discount price because the end price has been so long for so long, and the crude price has been so high for so long. that is what draws me to eog or continental. both with cheap fining costs for oil, and they've got expensive prices when they get it out of the ground. the bottom line, the key component for figuring out the growth related to the cohort is to figure out the rate of gross margins. it's uniquely calculated only by listening to the conference calls. cannot get it in the headlines or press reports. if you do not know the direction of the gross margins, believe me, you will not know the direction your stocks are about to take. it's part of the homework, and if you do not calculate it yourself, you have to get it from somewhere. brad in ohio? >> caller: booyah from ohio. gerard. >> i have not been there yet, i'll get there, i promised myself. >> caller: thanks for taking my

call. as an investor interested in specialty retail, i understand that the fourth quarter is definitely the quarter with the most significant earnings, but how does a person evaluate the first quarter earnings? >> i used to go back to the rules of my hedge fund, i do not care about the first quarter for retail, first quarter is not meaningful enough, does not move the needle. you only have valentine's day during that quarter. and i know this because my dad sells gift wrap, it's one of the things where you realize the seasons are and valentine's day does not move the needle as much as hanukkah. i say, okay, i'll make any judgments on retail on the fourth quarter. i wait to hear those quarters and make any judgment for the next year is going to bring. mike in illinois, mike. >> caller: this is mike, giving you a chicago bears bababa booyah. >> bears are a constant, what is up? >> caller: if i'm short on stock, how long do i have to cover that short? >> forever, that is one of the

great things about shorting. stay short as long as you want. if the stock goes up, they make ask you to put more money in, that is where people get squeezed. okay, you got to dig deep if you want deep profits. gross margins will direct you on the direction of a stock. gross margins, that is on the call. stay with cramer. >> jim crammer, looking out for you. >> thank you for helping us average joes on the road to financial freedom. >> thank you for helping us home gamers. >> thank you for sharing your knowledge with the every man. >> i love doing it, and any time anyone says that, i have to say thank you, it's great. >> anywhere, any time, any place. answering the call of cramerica.

>> you are hearing tonight for the first time, not how to figure out what the better or worse expected earnings report to do a good trade, seems to be a dominant way of thinking but how to put the reports to work for you, the best stocks and prune those that need to go. we figured out how to figure out the growth rate of a company and whether it's too expensive, i keep getting the question and now it's answered. we talked about the earnings

report and gross margins, something that can come out of the conference call only. now we have to address two more pieces of the earnings puzzle, dividend growth and home run potential. pretty much since the time i first started to buy stocks, dividender -- dividends were an afterthought. ever since i had my hedge fund. companies were -- it was your only returning money that the party's shareholders to make it easier for them to exit. the only winners were in extreme cases such as auto zone, okay, the only ones are executives that get paid for hitting earnings based targets. they do it by buying back just enough stock to make it to that when the share count is divided into the earnings per share. well, it beats the compensation benchmark that they were supposed to hit. only a very handful of buybacks

do what they are supposed to do, that is make it so the stock goes higher. but the buyback that actually accomplishes that goal, i got to tell you, i can count them on one hand. most buy backs are a huge waste of money, companies buy their stock when the stock was higher because they only know about their business and not stocks. which is fine, they should not try to time the market. what are the good companies doing? offering dividends. buybacks are indefinite, cable being reined in. you are stuck. dividends are a sign of confidence. low rates will be around for a while. thanks to the fed, dividends can provide a rate of return that cods that you keep trying to make money with can't. of course, stocks present more risks than cds and they can go down and they can often go higher. if you reinvest the dividends,

you can augment your return to the point where you are far exceeding a return on bonds. dividends are so important they have been responsible for almost 40% of the s&p 500 in the last ten years and are the main reason that the dow jones was far outperforming the s&p 500 s&p in 2011. 5.5% return for capital appreciation, and the only thing you should be thinking of with bench marks is cash in the pocket and safety net during the bad times and a trampoline in the good. what does it have to do with the earning component? simple. we listen for calls that tip managements hand on the dividend to tell us that there's enough excess cash available to boost the dividend. that is what we heard from ge, it was on every conference call. conversely,

if a company signals to buy back more stock, and it's ineffective in reducing the share cap, you have to look at the share caps from year before and so on, it's all about management enrichment. until less proven innocent. they are trying to contain the damage. a lot of tech companies do it. i regard it as disgraceful. no one else thinks that, i do not care. i know what i see. these days if it does not indicate that it will boost the dividend on the earnings call, count me out. unless they have huge earnings power, a la apple, then i'll overlook it. we have to listen for something that the company will do differently or announce soon that is an upcoming catalyst. i talk about catalysts. you need a catalyst to buy a stock. i listen to calls for not what happens but something that will happen. if i hear something that sounds like it will propel the stock in the future, i'm anxious to buy it. if there's a sell-off because someone is upset because it

didn't guide high enough to please the momentum funds of the stock, i got my opportunity. what are examples i look for? pharmaceutical companies. they often telegraph what is going into stage three. meaning what drugs may be in your final approval. and they tell you about expanded usage on the labels for drugs. allergen has told you more about the future on its call than any other. and it's a terrific buy. every time it sells off after earnings because of the up coming catalyst. constantly doing it. and selgy same thing, they give you a call telling you what comes up. and tech companies tip their hand about product cycles and products that will make a huge difference. pipeline companies, key creators of dividend wealth that we talk about all the time, they talk about upcoming expansions that can be added to earnings. and the upcoming exploration and earnings that they are looking into.

you may hear good news on the calls. i follow those and wait for the oil futures to go down and then i start to buy the oil. that is what happened last year with tlr, it gave you time to -- decide to buy, they were talking about the storms and the storms ended and nobody cared and then the stock took off when they told you that business is big and booming. bottom line, we look for futures in the signals of the calls, especially about up coming catalysts that will make them solid buys because it was not better than expected. we tried to talk about rising dividends, the best source of wealth that stocks can give us. there's no better way to find out about the increased dividends than to listen in on the earnings call. stick with cramer. let's go to kentucky. >> a hillbilly boo-yah. >> hillbilly boo-yah!

holy cow. >> a big las vegas bing, bing, bing, bing, boo-yah. >> big staten island, hey pal forget about it, boo-yah! >> boston -- >> nashville -- >> michigan -- >> california -- >> alaska. >> boo-yahs come from all across america. let cramer help you channel yours. "mad money" weeknights. outta new jersey, take thn but you can't take your pants off in a museum." [ laughs ] ted, i can't wait to take you home and run my fingers through that adorable hair. who says we need to wait 'til home? ♪ hey, i don't come here for the ambiance. axe hair? [ male announcer ] with teddy bear hair you can get away with anything. get some of your own with axe hair. come see ted in theatres. rated r. ♪ [ sound fades ] at a moment like this, i don't care if my tampons come in a little black box. tampax pearl protects better than u by kotex.

[ cheers and applause ] [ angie ] outsmart mother nature only with tampax.

♪ earning season doesn't have to be a gun for unfathomable numbers, tonight we have showed you for looking for signs of what to do with your portfolio over the long run, because of

the earnings reports and the conference calls, here is the deal. they do not have to be shoot first ask questions later experiences it can be the opposite. conference calls are ask questions, ask questions and more questions and then maybe take actions. we are talking about the growth of the earnings per share and how that affects other stocks in the sector and the market as a whole. usually the s&p 500. we want to judge if earnings estimates may be beaten in the future, we are looking of signs of dividends, the biggest cater of help and -- indicator of help to boost the stock. it's important because stocks can sell off in knee jerk fashion because a company did not beat somebody's estimate that may not have been informed

anyway. i had to add more items to the equation because of changes in the stock markets. the first is geo political risk. never cared that much about it. following american companies, american was king. it is linked exposures not just to the rising price of oil. that's always been an issue. but linked exposure to the debt and banking debt issues today of europe. and we need to ask ourselves of how much exposure there could be a given company to the chinese economy. for example, for most of 2011, it was impossible to own banks. they had the troubled euro and we tried to analyze the banks away from europe or the over stressed french and spanish counterparts, well, we got our heads handed to us. owning tech, when tech is depending on europe.

come on. as much as 20-25% earnings. drived from the continent, it's been deadly. that's how you learn about it, people. analyst will not let them get away with it. listen to q&a, and at the end of the call, if you are a company of european exposure, you will hear one out of every two or three questions about europe. asia, one out of two questions about others, if you want medicine, go through the previous calls of your company. if the questions are about europe, you know you are in for a bruising next time. that is what the analysts are focusing on, that is what they are forcing the companies to talk about. as correlated with europe as tech and bank stocks are, it's china that owns the cyclicals, the smokestack companies. go listen to the earnings calls of caterpillar, check out the calls of peabody or others, owning these stocks is like owning a piece of the great wall of china. you want to be in them when the

great wall is crumbling. i have seen downgrades of stocks that -- they've got a huge chinese business through kfc. and i v seen coach and kfc, who has been expanding in china, owning a steel company without paying attention is like taking your financial life in your own hands. how do you find out about the issues? a company that is diverse, they march to the beat of the asian drummer, it's all in the pestering by the analysts. it's simple, listen to the call, and do not hang up on the call until you heard the transcripts. you can see how the analysts are worried. a final piece that is incredible. it's the earning season that you have to weather something that i never talked about before. okay. and we have to do it before we are done for the night. one that is obvious to anyone who watches the show regularly. i can't believe i have to do

this. i'm a fundamentalist. i cannot believe i'm going to say it. you have to know the chart of the stock ahead of the -- we trace out what a stock pattern could be, and why is it important? you have to decide whether it's the expectation and what it is. you have to recognize that the chart was the gauge of the expectation, you looked at the chart. that tells you whether the expectations are high. often a chart rallies to a particular level, a level of ry -- of resistance. if the quarter isn't up to snuff, the stock can get hammered because of a chart failure. i do not want you to react to charts. i want you to use it in your favor. which is why i saved this chart take for last. you know what is an ideal stock to buy, one with rising earnings and rising gross margins and potential for dividend increase and some good news on the horizon. that gives you the chance to get

in at a good price, one that you would not otherwise be able to get because of the chart. why is it so important? because no journalist is going to attribute the decline in the stock to the chart. so many hedge funds are reacting to the chart and taking silly action because of it. i'm not a chartist but i play like one when i have to. the bottom line -- if the question and answer to call resolves about crisis in europe or asia or anywhere else for that matter, be prepared for hammering this current quarter. if a stock goes down big after a quarter you think should be going up later on, remember that it may be the chart telling the tale and giving you a chance to get in cheaper than you might otherwise have a chance to do. now you are ready for the rest of earnings season, go get them. and tell them cramer sent you. dean in california, dean? coil h >> caller: welcome to beautiful marin county.

it's beautiful here. listen, i check my stocks at the end of the day, usually you'll see a little blurb to news ned lines that says, for instance, a particular stock has a close or buy in balance at the end of the day and they will name the shares. what i want to know is what exactly do the close and buy and balances mean and do they have implications for the next day? >> no, no, do not worry about it. it's more distractions, a lot of the buying may be etf related or market on close program. it's confusing to people, we care about the fundamental. maybe it affects the chart or not, we care about the fundamentals not the imbalance. that would matter only if you are a big broker working a 100,000 share portfolio. it's all in the conference calls. the company's earnings release is much more than that. i need clues. clues that will signal where a company is going, and i like to look at the charts. and well, call me. call cramer. "mad money" back after the break.

constantly taking the pulse of the market. you need someone who has the street record, track record, and market intuition to be your guide however the market moves. let jim cramer be your man on the street. [ molly ] wash your paws, mr. man! [ female announcer ] think your kids are getting a dependable clean -in the bathroom? -[ gasps ] [ female announcer ] think again. try charmin ultra strong. for a clean that passes inspection with fewer pieces left behind. its diamondweave texture is soft and more durable versus the ultra rippled brand so it holds up better for a more dependable clean. fewer pieces left behind. now who's the man? you both are. [ female announcer ] we all go. why not enjoy the go with charmin ultra strong?

mike's being healthy and chewing like a man. introducing one-a-day vitacraves for men! it's a gummy multivitamin... with more vitamin b, to convert food to energy, and help mike do manly things, like wrestle bears and take out the garbage. new one-a-day vitacraves for men. veet wax strips have a hair coating technology that leaves skin smooth for up to 28 days. try getting that with a razor. veet. what beauty feels like.

cramer's gone mobile. top stories, lightning round 2 go, "mad money" videos and more. plus free real-time quotes dpmp to mm.cnbc.com. >> now let's do mad mail, and

yes mad tweets, @jamcramer on twitter. hello, jim writes bob, you encourage home gamers to do their home work, although i dvr every episode, i do not know what you suggest we should involved in doing our homework. what do you suggest we do? here is what you do, i wrote a book, you hear a stock that you like, you decide to get to know it. you go to the web site, the web sites these days have almost everything. you read about the last few quarters and i like to read the annual report and call what the analysts are saying, i like to see what is in the pipe. i like to see dividend is, and by the way, i like to think what would make me sell it. if they missed or did certain things or the stock went up too high. a lot of things for homework, it all starts with the web site.

this is from trace, hi, jim, as we know the department of defense is planning to downsize the military over the next few years as we also conclude our business in afghanistan, do you feel that the large number of military people will flood the job market and increase the demand for goods? >> no, they do not move that fast and if anything there could be a peace dividend if we get to that where we can cut the budget deficit. i do not think you should look at this issue in a way to be able to make money off of it though. it's really not a needle mover, and it can be negative for the defense companies as we know, and they've been under a cloud because of the us cans. danny from new york, i have heard you say that you would short the stock, rather than buying a put. please elaborate on your reasoning. i favor the puts in spite of a short position. danny, i'm glad you sent me

this. if i have created a misperception that i am a fan of shorting stocks, i always do puts, i rarely do shorts because as i write in confessions of a street addict, i was a victim of a horrible short squeeze, and it lost me a ton of money. use puts. i don't care if there's a premium. let's get g to tweets. here is one from kelly. covered calls allow me to print money out of large positions without having to sell, why do you hate them so much? >> here's the answer -- i have to tell you something, bkelly019, i hate trapping my up side, i hate cutting off the up side. that is what writing a call does, you cannot make more money than writing the call. you are vulnerable because you have short the call. never, ever, ever cap your upside. that's always been my rule, never sell a put. that i think, and i've seen it in '87, i saw that put people out of business.

i saw it again in 2009, put people out of business. trust me, i've been around for more than three decades. trust me on this. okay, here is one from jeff, how do you approach stocks like these in earnings season? >> all i care is government pay, if the government is not paying hospitals, i don't want to touch them, because there's not enough hospital mergers that can be done without the government stepping in and saying you know what? we have to block that. so with hospitals, if the government's on your side, i'm a buyer. if the government's against you, stay away. but stick with cramer. >> don't get mad, get even. more "mad money." catch cramer at 6:00 and 11:00 eastern on cnbc. [dumbfounded] well, we... doesn't last long does it? listen. 5-hour energy lasts a whole lot of hours. so you can get a lot done without refills. it's packed with b-vitamins and nutrients to make it last.

so don't just stand there holding your lattes, boys. make your move. we'll take the 5-hour energy. smart move. 5-hour energy. hours and hours of energy. with head & shoulders? since before jeans were this skinny... since us three got a haircut. since my first twenty-ninth birthday. [ female announcer ] head & shoulders. live flake free.

they say money never sleeps. neither does jim